Mining Indaba 2017: The mining industry as a prism for the lethargic industrial economy
The Minister of Mineral Resources, Mr Mosebenzi Zwane, addressed the African Mining Indaba in Cape Town against a background of hostile and uncertain domestic mining policy. The mining industry is in some respects a ‘canary in the coal mine’ for South Africa’s broader industrial economy - the net decline in the number of mining jobs since 1994 reflects the broader malaise in the industrial economy.
Yet the minister failed to soothe investor concerns reflecting the government’s broader inability to stage a growth recovery. The paradox is that such a recovery is the single most important thing necessary to secure the long term stability of the current government.
South Africa spent four years of the 1980s at economic growth rates of on or below 0%. The first three years of the 1990s each saw negative rates of growth. The pattern changed after the transition and between 1994 and 2003 South Africa averaged growth rates of 3.3%. Then for a brief four years between 2004 and 2007 growth rates rose to average 5.2%.
The combined effects of the ANC’s policy conference in December of 2007, the 2009 global financial crisis, and concomitant pull back in commodity prices were too much for the South African economy to withstand. Growth levels sank to just over 3% in 2008, turned negative in 2009, rebounded off that low base to touch 3% again in 2010 and 2011, and then retreated steadily bottoming at 0.4% in 2016. Since 2008 growth rates have averaged just 1.7%.
Our analysis of the growth pattern revealed the following things:
South Africa’s economic growth rate tracked the global growth rate very closely between 1994 and 2012. However, in 2013 the two indicators began to diverge as global growth rates stabilised but South Africa’s growth rate peeled away quite sharply downwards.
A second observation was that when South Africa breached growth levels of 5% growth in fixed capital formation was increasing at rates of between 10% and 13% per annum. Since 2008, however, fixed capital formation levels have been increasing at average rates of below 2%.
A third observation was that when South Africa breached the 5% growth level consumer expenditure was increasing at a rate of between 6% and 8% per annum. However, household debt levels have escalated by over 60% since the late 1990s, tax increases seem inevitable, and consumer confidence levels have hit decade deep lows twice over the past two years.
Our fourth observation was that only in the 5% growth era of 2004-2007 did South Africa record a sustained drop in the unemployment rate – a drop, and this is the crux, which triggered record high levels of popular confidence in the government and the future.
Our conclusions are that South Africa has uncoupled its economic performance from the global economy. We would extend that conclusion to the mining industry specifically and encourage policy makers to consider that the outlook for the South African mining industry is set to be very different to that of the global mining industry.
The reason is mainly domestic policy decisions that discourage investment – a point reinforced by the nature of the Minister’s address at the indaba. This conclusion aligns with the experience of the great majority of firms (mining and otherwise) we have advised over the past several years which with few exceptions have experienced the investment climate as hostile. Annual rates of increase in fixed investment will need to rise five-fold if South Africa is to again aspire to reach economic growth levels in excess of 5% and only then will South Africa again be in a position to make inroads into its unemployment problem. The government’s very survival will hinge on this last point.
The economist John Loos makes the point that when the Mandela administration came to power it had at its disposal series of ‘economic levers’ with which to stage a growth recovery. These included the cutting of interest rates (by half) which matched with low consumer debt boosted domestic consumption expenditure, access to cheaper borrowing as bond yields fell (also by half), rising commodity prices, and significant excess infrastructure – most notably in electricity.
Few of those levers are on offer to the current administration (we expect rates and bond yields to rise, while both consumers and excess infrastructure are tapped out). The only levers that remain are those of structural reform including labour market deregulation, the securing of property rights, and reworking empowerment policy. Yet the Minister of Mineral Resources, taking a lead from many of his Cabinet colleagues, is far from willing to pull these remaining levers. Until that changes the mining industry will remain in the doldrums setting a lethargic pace for the broader industrial economy.
Frans Cronje is a scenario planner and CEO of the IRR – a think-tank that promotes political and economic freedom.